A tale of 2 depressions

Despite the president’s call for additional stimulus, the government has, in recent months, finally achieved a bipartisan agreement to focus on — austerity!

President Barack Obama’s speech before Congress was a needed recalibration of the nation’s political trajectory. But not enough of a course correction for an economy in distress.

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Congressional Republicans and the Democratic president are now searching for yet more ways to cut spending — virtually replicating the cause of a renewed, and sharp, economic downturn during the Great Depression in 1937.

President Franklin D. Roosevelt had never really been a believer in Keynesian economics. He worried greatly about the budget deficits created by the New Deal programs. When he decided that his 1936 reelection was secured, FDR began cutting back on spending — particularly the work relief programs of the Works Progress Administration. Demand in the economy was further depressed by the beginning of the collection of Social Security taxes to build up the system’s trust fund with no payments yet being made.

The result was the recession of 1937-38. Unemployment soared back up to 19 percent and the Dow Jones Industrial Average dropped by 50 percent. It took renewed spending to reverse this new slide. Ultimately, it took the massive spending for World War II to bring about full recovery.

Many leading economists cited this cautionary tale during the arguments in passing the first stimulus in 2009. They asserted that a larger stimulus was the best way to address the U.S. economy’s free-fall.

Yet now, most of our leaders, especially those in the Republican Party, are intent on repeating the mistakes of 1937. To alter the words of historian George Santayana’s famous dictum: “Those who willfully deny the past condemn us all to repeat it.”

There is, unfortunately in the view of many of us, no WPA to cut back today. But the wrongheaded budget cuts are causing the loss of vast numbers of state and local jobs that had been saved by the original stimulus. Those job losses will inevitably have a reverse multiplier effect — call it a divider effect — on state and local economies across the nation as private-sector businesses lose sales they would have made to government employees had the latter kept their jobs.

“It shows how much we’ve changed the terms of debate in this town,” House Speaker John Boehner (R-Ohio) told Republican members in a conference call before the vote on the debt ceiling bill. The agreement, he continued, was “all spending cuts. The White House bid to raise taxes has been shut down.”

Boehner’s statement highlights the stark contrast between the consequences in politics and economic philosophy of the Great Depression and the economic collapse of 2008. Then, public sentiment turned sharply against the party in power during the period leading up to the 1929 crash — and against the classical, laissez-faire economic beliefs that had been in vogue.